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The global capital markets are mostly quiet and the
dollar is mixed, but mostly softer. There are
three developments we direct your attention to: the RBA
rate cut, Spain and aid, and the US block of a Chinese
acquisition.

The euro has been confined to about a half cent range in
the upper end of yesterday's range. Resistance is seen in
the $1.2940-60 area before last week's high just above $1.30
comes into view. A softer than expected, but better than
August, CIPS construction PMI in the UK has kept sterling
range-bound as well. Offers are being encountered on
pushes in the the $1,.6170 area, but important resistance is not
seen until $1.6210-30. The dollar is testing last week's
high just below JPY78.30. The slog gets more difficult
between there and JPY79.00

The Reserve Bank of Australia delivered 25 bp rate cut that
indicative prices suggested was largely anticipated, but where
opinion polls showed greater doubts. The important thing
here may not be the lowering of the cash rate to 3.25%, but the
dovish comments, which clearly opened the door for additional
easing before the end of the year.

There are two considerations. First is domestic inflation.
The Q3 report is due out on Oct 23. Headline inflation
(Q/Q) in Q2 was 1.2% and the trimmed mean was at 2.0%. The second
is the global economy. This is not just the Chinese economy,
which is of course important for Australia, but also the more
general state of the world economy. Provided price
pressures remain subdued and the world economic outlook bleak, a
rate cut in early December appears likely, though a move in early
Nov (Nov 5) cannot be ruled out.

The Australian dollar briefly traded below $1.03, after testing
$1.04 yesterday. Resistance is seen in the $1.0320-40
area. Judging from the recent IMM data, the
short-term momentum and trend followers were leaning in the wrong
direction. It warns of the possibility of trapped longs
that will likely sell into bounces.

Press reports suggest Spain's Rajoy is done with the flirtation
and now wants to consummate the deal and formally request
aid. At the same time, the reports shift the burden of
potential delay to Germany.

Germany's position appears two-fold. First, German
Finance Minister Schaeuble has told his euro area counterparts
that it is difficult to present a case for new aid to Spain so
soon after the 100 bln euros was agreed upon.
Chancellor Merkel has also reportedly indicated a preference for
avoid piecemeal votes and instead seeks a larger package that
includes a resolution of Cyprus, Greece and Spain.

Second, is the question of what are the funds for.
Germany wants them to be "must haves" not "nice to
have". That is to say, it must be an emergency and
one does not exist at the moment. Consider the Spanish
premium over Germany. At the 2-year sector is its 315 bp
now. At the end of 1993, prior to the real convergence for
EMU, it stood at 276 bp. The current 10-year spread is near
425 bp. At the end of 1993, it stood at 248 bp.

The short-end, which the ECB's OMT scheme focuses, does not
appear at an emergency level or one that reflects a broken
monetary transmission mechanism. Moreover, understanding
the interest rate premium now, also requires appreciating that
Spanish inflation is running 150 bp on top of Germany, which is
twice the inflation differential in 1993

With the various unconventional policies in the US, Europe and
Japan, talk of "currency wars" has resurfaced. Action at
the end of last week by the US to block Chinese ownership of a
wind farm in Oregon seems to fit well into such a narrative of
beggar-thy-neighbor policies. Yet closer suggests it
is not the beginning of a downward spiral as in
Smoot-Hawley.

While acknowledging that the timing of the Obama
Administration seems political after Romney's criticism of
Obama's China policy, it is likely a one-off move.
The same Chinese company has been allowed to purchase two other
wind farms (in Massachusetts and Texas). The concern is not
the industry, but the location of the wind farm in Oregon, which
is near a US naval base and where cutting edge technology
(drones) are used.

There is also the fact that the purchase was completed without US
officials being informed. In fact, according to press
reports, this only came to light after the Navy objected several
months ago. The location coupled with the failure
to follow proper procedures strongly suggest there is not
far-reaching implication for US policy. Nor is an
expression of the "currency wars".